Can ADUs solve the housing crisis?
Maybe, but it's still a little tricky for surprising reasons
I’m thinking a lot about Boomers and how they’re hoarding wealth and homes—it makes SO MUCH more sense to share when their family needs it, and the longer they wait, the less their cash is worth. An example: If your kids want to buy a $400,000 home and you hoard your gift until after you die in 10 years, that $400,000 home would be worth, say, $600,000 and they’ve missed out on all that equity, plus they’ll pay interest and/or rent in the meantime.
But also, I realize that some folks feel trapped in their situations, because often it’s more expensive to move after 35 years than to stay put. I spoke with Whitney Hill, who thinks that ADU can solve this problem. She is co-founder and CEO of a general contracting company in San Diego that designs and builds ADUs. She says that half her clients take the leap for families, and half for income. Either way, it’s often a solid win for Boomers.
This interview has been edited by a human being (me) for brevity and clarity.
Vanessa McGrady: I am a real estate agent, and I show properties with ADUs. One thing I’m noticing, though, is sometimes an ADU actually takes away the things that make a house so desirable for people: the garage and the yard. Can ADUs backfire on homeowners?
Whitney Hill: You lose privacy, you lose the flexibility of the yard spaces, the garage, those sorts of things,. We certainly see people who decide not to build an ADU for those reasons, but usually when they go through the risk-return, it does even out. ADUs are fairly new asset classes. There are some studies, though, from the Federal Housing Agency showing some of the initial sales data on properties with ADUs versus properties with, and there is an advantage to the properties that have ADUs.
VMc: How much does an ADU cost?
WH: When you’re building for a small one bedroom, one bath, 500 square-foot unit, I would say all if you’re going to be in the high $200,000 for everything and all finishes all the way to appliances. For a larger unit, say, three bedroom, two bath, 1,200 square-foot unit, you’re going to be around the low- to mid-$400,000s for the all-in cost. It really depends how big of a unit you’re building.
VMc: Are people getting traditional loans for this? How are they financing it?
WH: Most typically we’re seeing folks tap equity in either the existing property or another one. Sometimes you’ll see aging parents selling their homes in Florida to come move here and build the ADU. As far as actual loan products or construction loans, you do see a handful of those. They are not as common here, largely because a lot of the jumbo loan rates get tapped out pretty quickly in the markets that we operate. So at this point we still see a lot of folks just using equity as more loan products that start to recognize ADUs, for rental income, for example. We hope to see more options open up as far as financing.
VMc: Who is not a good candidate for an ADU, and who is a great candidate for an ADU?
WH: I would say great candidates are folks who have a property that’s suited for it; you need access to wherever you’re building. The second that you start having stairs up to get to the landing in the back of your yard, you’re going to start adding costs. Also, if you’re in any sort of an overlay with an environmental consideration, let’s say some kind of a coastal sage scrub or a wetland, those are definitely not advantage blocks for ADUs.
If you are set on a particular ownership model where you want your kids to be able to own just their ADU while you own the property, like those setups are difficult right now. The folks who do decide to move ahead anyway are the ones that are comfortable with putting multiple people on title, perhaps having an agreement outside of the mortgage itself. There are not as many ways to split this up; the ADU is, by nature, sold with the primary home.
There’s some evolution in that you are able to sell off the ADU as a condo in some markets. For some folks that’s a non-starter, because they want to have clear ownership over the different pieces, and they can’t find a way to do that.
VMc: Does this break down along any demographic lines?
WH: I would say anecdotally that we are seeing more families leaning into multi-generational living, creating these little family compounds.
VMc: How do people get started on their ADU journey? There are thousands of shady businesses that take half of your money, get it started, and then you’ll never see them again.
WH: I’m biased towards this, but I’m looking for a design-build company that’s going to be able to speak to the overall cost. [Instead of just going to an architect for a ballpark figure] it’s super important to get that contractor perspective. If you can’t get an integrated firm that’s got the experience, the next best thing would be the architect who does have the experience with ADUs, and then couple that with a contractor early on.
The main thing here is to pick people who have done quite a few of the same type of project before. You can always cross-check what you’re hearing with the city, depending on what jurisdiction you’re dealing with. Some cities have virtual counter visits where you can set up a Zoom call to discuss your property. Now they’re not going to commit to anything, but they can give you directional answers, and you’ll very quickly understand who’s doing their homework and who’s not, and then I would also say that it’s important to figure out how you’re going to approach this. If you’ve already done some work in this field, more of this will feel accessible versus your first rodeo.
VMc: What if you have a big house or an awkward house, and you just want to add on instead of a fresh new build?
WH: The attachment ADU is certainly an option. When you touch an existing structure, now that structure is going to have to be brought up to code as well, so that’s the biggest reason we do not do attached or conversion ADUs, and we just stick to new builds because it’s more predictable.
People do additions all the time. There are different regulations, usually, that apply to attached versus detached ADUs. A lot of them are more favorable, as far as not requiring as extensive of utility upgrades, and in some cases, things like not having to have a separate electrical panel, and being able to share more of the infrastructure as possible with attached units. There are, in some cases, though, more limits on the sizes. Sometimes they’re tied to the overall size of the main house and you can’t build it bigger than 50% of the main house, so you have to just be mindful of the different regulations. The cost-saving is a bit of a wild card, depending on how much infrastructure you need to upgrade on your main house. If you’re building above a garage, let’s say, a lot of times you’re having a retrofitted foundation to support that new build above it, so even in cases where people come to us and say, “hey, I’ve got this decayed garage and I want to convert it to the EU,” if it’s an older garage, it’s almost always about the same cost to just demo the whole thing and start over, as wasteful as that sounds, because there is so much that typically has to be registered, so in a lot of cases, we see people starting from scratch if they’ve got the older garage to begin with.
VMc: What if somebody feels stuck—you have an older person in a house that’s paid off, they want an ADU, but they’re having trouble qualifying for a loan. Is there any hope for them? Are there companies that will maybe invest in this, or their alternate financing for these?
WH: There have definitely been companies that have come and gone offering different models like that, where they’ll come and back to build AU with you. I’ve seen several of them go under, so I can’t recommend one. I think this is going to evolve. There aren’t a ton of creative options that have been well-proven. In fact, I would be very skeptical of any ad you see that says build an ADU for zero down.
VMc: What do you see happening in terms of policy? Do you feel like it’s getting easier and there will be more housing built through ADU to help alleviate the housing crisis, or is it getting worse, or what? What magical thing needs to happen?
WH: We’re certainly seeing more and more jurisdictions, and even states, adopting ADU regulations, and now that we’re six years or so into the laws that California passed. Now we’re seeing things like fire code and utility interpretation enforced much more stringently than they were even just two years ago, where it’s resulting in the overall cost to build going up tens of thousands of dollars. So that’s a big barrier. All the different applicable codes that are there for life and safety that make sense on a bigger development, but on any single unit it can become cost prohibitive.
Of the people who reach out to us who want to build an ADU, only about 10% of them ever end up actually submitting for a permit, and we know that from going in and looking at which ones actually end up in city permitting databases.
Sometimes the family situation changes, but more often than not, its cost, either because they can’t get the loan, or they just think it’s too much for what they get because the cost of square foot for these little houses is very high. People have a lot of sticker shock. The other part of that is that for every single ADU, you’re doing the same entitlement process that you would for 100-unit development, your developer. We have to do it for every single block, so it’s a whole lot of overhead for very smart people trying to solve all these different interactions on every little project, which makes them very expensive.